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Consumer Banking and Payments Law: 2.7.2 Overdraft Loan Fees Described

This subsection covers fee-based overdraft programs under which the bank pays certain items, and charges an overdraft fee, despite the account having insufficient funds. Fee-based overdraft programs, sometimes euphemistically called “courtesy” overdraft services or “bounce protection,” extend short-term credit at triple-digit rates88 but exploit legal loopholes to avoid compliance with credit laws.89

Consumer Banking and Payments Law: 2.7.4 Regulation E Overdraft Fee Rules

In 2010, Regulation E, which implements the Electronic Fund Transfer Act, was amended to impose opt-in consent and disclosure requirements applicable to overdraft fees charged on non-recurring debit card and ATM transactions. Regulation E does not require banks to obtain consent from the customer before extending fee-based overdraft loans to cover check payments, ACH transactions, or recurring debit card transactions.

Consumer Banking and Payments Law: 2.7.5.1 2005 Joint Guidance

In 2005, the federal banking regulators issued a joint guidance concerning overdraft loans.124 The joint guidance reviews legal risks for institutions offering overdraft loans under several of the statutes in the federal Consumer Credit Protection Act but ultimately does not conclude that these loans violate any of the laws.125 The joint guidance also sets forth “best practices” for institutions offering overdraft loans, including limiting overdraft coverage to checks alone (that is, excluding d

Consumer Banking and Payments Law: 2.7.7 Do State Credit Statutes Apply to Overdraft Loan Charges?

It is a complicated question as to whether state credit statutes apply to overdraft loan charges. Those laws may be preempted, and even if they are not, overdraft loans may not fit cleanly within their terms.

When a national bank, federal savings association or federal credit union is involved, any state credit statutes will likely be preempted by federal banking laws, so the scope of the state statute is moot.191

Consumer Banking and Payments Law: 2.7.8 Other State Laws Governing Overdraft Fees

The UCC generally permits banks to charge any fee agreed to in the contract with the consumer.207 However, the UCC requires banks to act in good faith,208 and some state versions of the UCC hold that actions that maximize fees are not in good faith.209 The application of these UCC laws to the process of reordering transactions to increase overdraft fees is discussed in

Consumer Banking and Payments Law: 2.7.9.1 Nature of the Problem

The order in which a financial institution processes a drawer’s checks and other transactions can determine the number of overdraft and not sufficient funds (NSF) fees assessed to the drawer.219 Financial institutions have an incentive to process the largest transactions first, as this will maximize the number of checks that bounce or transactions that are paid as overdrafts.220 Because overdraft and NSF fees are assessed per transaction, this also maximizes bank fees.

Consumer Banking and Payments Law: 2.7.9.2.2 The UCC and other state laws

Article 4 of the UCC provides that items “may be accepted, paid, certified, or charged to the indicated account of the customer in any order.”233 A number of courts have interpreted this provision to permit the financial institution to pay larger checks first, thus depleting the account sooner and charging overdraft or NSF fees on the smaller checks.234

Consumer Banking and Payments Law: 2.7.9.2.3 Federal regulator guidance

Older regulator opinions on the subject of payment reordering have only dealt with check processing. For example, in 2001 and 2002, the OCC issued interpretive letters permitting banks to post checks in a high-to-low order.268 The letters do not discuss electronic transactions. The banking regulators’ joint 2005 guidance urges banks not to approve overdrawn debit card transactions at all,269 although that guidance has been widely ignored.

Consumer Banking and Payments Law: 2.8.1 In General

Banks and other payment providers often impose a variety of fees for various account activities. The source of the consumer’s liability for these fees is the account agreement.289 If the agreement or documents incorporated by reference into the agreement do not grant the bank the authority to charge a fee for a particular service or activity, or fail to disclose the fee, then the bank may not charge the fee.

Consumer Banking and Payments Law: 2.8.2 Changes to Fees

After banks and their customers enter into an agreement at the commencement of their banking relationship, banks periodically raise fees or impose fees on services formerly offered without charge. The UCC permits unilateral changes in the terms of the original agreement as long as such unilateral changes are authorized in the original agreement.295

Consumer Banking and Payments Law: 2.8.3 NSF Fees

A consumer paying with a check or automated clearing house (ACH) transaction with “not sufficient funds” (NSF) in the consumer’s bank account faces two types of liability if the financial institution returns the transaction unpaid rather than paying it as an overdraft.

Consumer Banking and Payments Law: 2.8.4 Other Bank Fees

Banks often charge fees for services that they are required by law to perform. Depending on the context, those fees may be impermissible, especially if they discourage consumers from exercising their legal rights or enable banks to avoid legal duties.312

Consumer Banking and Payments Law: 2.9.1 Overview

Closing a bank account might appear to be a simple matter, but increasingly it is not. In the old days, consumers merely needed to make sure that all outstanding checks (usually recorded in the consumer’s check register) had cleared, and then simply requested the bank to close the account.

Consumer Banking and Payments Law: 3.1 Scope of This Chapter

This chapter examines a consumer’s rights and liabilities when the consumer writes or authorizes (or allegedly writes or authorizes) a check1 to be paid out of the consumer’s bank account.2 Chapter 4, infra, examines a consumer’s rights and liabilities when the consumer is the payee on a check.